For many years, self-employed individuals could access favourable rates of tax by setting up a limited company and filing all their invoices, expenses and tax returns through it. However, the introduction of IR35 legislation into the public sector in April 2017 – and its expansion into the private sector in April 2020 – means that it will soon be significantly more difficult to achieve those same benefits. In fact, for many people, they may be liable to paying thousands of pounds more in tax from next year.
As a result, umbrella companies are becoming an increasingly attractive proposition for those who don’t want to be caught in the IR35 dragnet. Whether switching to an umbrella company at the request of your client, or contracting one of your own volition to avoid the eye-watering hike in tax and national insurance contributions (NICs) that the upcoming legislation will incur, it makes sense to get your facts straight with regard to how much tax you’ll soon pay.
Once signed up with an umbrella company, you’ll effectively becoming an employee of that firm in the eyes of HMRC. This means that how much tax the umbrella company deducts from your pay is calculated via pay as you earn (PAYE) – which is exactly the same way in which a permanent employee in any other industry meets their tax obligations. Here’s a breakdown of exactly what that means.
When working as an employee of an umbrella company, tax payments, NICs, the umbrella company’s administration fee and any other contributions are all deducted from your wage slip each week or month, exactly as they would be for any other PAYE employee. Let’s look at each of those ideas in isolation to gain a better understanding of exactly what that will mean for you:
Forming the basis of your tax obligations, the amount of income tax you will pay is dependent upon your tax code and the part of the UK in which you reside. As of April 2020, your personal allowance (the threshold of earnings upon which no tax is payable) will rise to £12,500 for most people across the whole of Britain, but the rates for earnings above that will vary slightly depending upon your location.
In England, Northern Ireland and Wales, any earnings between £12,501 and £50,000 is taxed at 20%, while that between £50,001 and £150,000 will receive the higher rate of 40% and earnings above £150,001 will be taxed at the additional rate of 45%.
In Scotland, things are slightly more complicated with five tax bands. The starter rate of 19% is applicable on earnings between £12,501 and £14,549. The basic rate of 20% comes into effect between £14,550 and 24,944, rising to the intermediate rate of 21% at £24,945 to £43,430. The higher rate of 41% applies to earnings between £43,431 and £150,000, while the top rate of 46% affects all earnings above £150,001.
As with all PAYE employees, these contributions will be calculated by HMRC and deducted from your wage slip automatically by the umbrella company before you receive your salary.
As a self-employed contractor working for an umbrella company, tax is only one facet of your obligations to HMRC. NICs account for another big deduction from your pay packet and are split into two kinds – employer’s contributions and employee’s contributions.
Depending upon the nature of your arrangement with both the end client and the umbrella company, their employer contributions may well be deducted from the value of any invoices that are submitted through them. You will also be liable to pay employee’s NICs on top of those.
For the tax year 2019/20, employer’s contributions have been fixed at 13.8%, while employee contributions stand at 12%.
As well as income tax and NICs, it’s likely there will be a number of other deductions visible from your pay slip. Unless otherwise specified by the umbrella company, your holiday allowance is likely to be fixed at 12.08% (although some firms may insist that you take the annual leave instead).
Meanwhile, pension contributions are another scheme into which you will be automatically enrolled when you join the umbrella company (as per their legal obligations). However, this is an optional extra from which you can immediately unsubscribe (and receive a refund on any funds paid) if you wish.
Finally, you must also pay an administration fee to the umbrella company for their services. This will either take the form of a fixed weekly or monthly fee, or one that fluctuates as a percentage of your income. It is strongly advised that you steer clear of the latter arrangement, since the umbrella company will stand to benefit massively as your income rises without providing any additional services.
In an attempt to differentiate themselves from their rivals in a highly competitive market, some unscrupulous umbrella companies advertise the capability to achieve higher net take-home pay for their clients, with some firms claiming you will receive as much as 85% or even 90% of our overall income.
It’s very important that you do not involve yourself with these companies. How much tax an umbrella company must pay on behalf of its employees is exactly the same across the board and every contractor – regardless of their individual circumstances or arrangements – must operate according to PAYE regulations. Therefore, any companies advertising “higher net pay” rates are not compliant with HMRC legislation.
Unfortunately, in the event that you do enter into a contract with such a company and are subject to an investigation from HMRC, it is ultimately you who will be held accountable for the discrepancy. You are always deemed responsible for your own tax obligations, so ignorance is not an excuse in the event that an illegitimate umbrella company does not file your taxes correctly.
At Umbrella Supermarket, we make sure only the most reliable, trustworthy umbrella companies are listed on our site. Using our umbrella comparison tool, you can get quotes from these companies to see which is best for you, without having to worry about any non-compliance. It’s that simple.
Any contractor considering switching to an umbrella company will want to know how to find the best provider to work with.
Although you could spend your precious time and energy searching the web for the best umbrella company, there is an easier way – using an umbrella calculator.
In this guide, Umbrella Supermarket explains why every contractor should use an umbrella calculator in 2021.
If you are considering contracting you will need to decide on PAYE or umbrella.
It can be a difficult decision to make and contractors will inevitably be questioning which option will be the best for them.
To help every contractor get on the right track for them, in this guide Umbrella Supermarket looks at PAYE vs umbrella, outlining the key differences and how this will impact you.
There are many reasons that contractors across the UK opt to work under an umbrella company.
Umbrella companies offer an easy way to contract and remove the need for the contractors to worry about the burdens of admin, finances, tax and IR35, all things that limited company contractors have to deal with.
For this reason, many contractors will be weighing up their options and questioning whether it is worth using an umbrella company in 2021. To help make the decision that little bit easier, Umbrella Supermarket has put together this guide on the pros and cons of using an umbrella company.
Any contractor that is considering operating through an umbrella company in 2021 will need to understand Umbrella Company fees - from why an umbrella company charges fees, how they are paid to how much the contractor will pay.
In this guide, Umbrella Supermarket answers those all-important questions to help every contractor know exactly where they stand when it comes to umbrella company fees.
If you’ve made the decision to contract through an umbrella company in 2021, you will next need to find an umbrella company that’s right for you.
After all, there are lots of umbrella companies out there, so how do you know which one to choose?
To help you find the best umbrella company for you, in this guide Umbrella Supermarket outlines what makes a good umbrella company, so you can rest assured you’re making the right move.
One of the many advantages to operating through an umbrella company for contractors is that they become an employee of their chosen provider.
In turn, this means that the contractor will be automatically enrolled onto the umbrella company’s workplace pension scheme.
To help contractors find out more about umbrella company pensions Umbrella Supermarket has put together this handy guide.
If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.
After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.
PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.
To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.
One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.
To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.
Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.
One way that contractors can work is through an umbrella company.
Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?
To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.
There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.
After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.
However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.
To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.
If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.
To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.
